Shiseido Co Ltd Ord

From here, I would like to explain the third quarter performance for 2024. First, please take a look at summary on page 3. After the summer, travel retail in China faced further challenges. The third quarter was a quarter focused on achieving profit by thoroughly improving efficiency and scrutinizing costs. The good news is Japan. The results of the reforms implemented so far are clearly reflected in the significant increase in profits, which has become a key driver supporting the overall company's profitability. Consolidated net sales on a like-for-like basis, excluding the impact of foreign exchange and all business transfers, declined by 8% in the three months from July to September and by 3% on a cumulative basis for the third quarter. In Japan, the core brands continue to perform well with the launch of new products in the third quarter driving strong growth. Despite a slowdown in inbound sales, the overall business in Japan continued to show double-digit growth on a cumulative basis. In EMEA, sales declined in the third quarter due to shipping delays and other timing issues, but on a cumulative basis, sales showed an increase. On the other hand, in travel retail in China, the decline in Chinese consumer demand, which became evident in the first half of the year, accelerated further in the third quarter, resulting in a greater than expected decrease in sales. In the Americas, net sales continued to decline in the third quarter. The production shortfall caused by IT system implementation issues in the second quarter, which had led to a significant sales decline, has been largely resolved. However, there has been a delay in recovering from the loss of consumer purchases due to the supply reduction earlier in the year. Core operating profit for the third quarter on a cumulative basis was 27.4 billion yen, a decrease of 9.4 billion yen compared to last year. The significant impact of declining sales in the high-margin travel retail segment was a major factor. However, the Japan business has steadily improved in terms of profitability and productivity, realizing significant increase in profit. In the light of the performance being more challenging than expected in travel retail, China and the Americas, as well as a more difficult outlook for the fourth quarter than what was expected in August, we are revising our full year forecast for the core operating profit from 55 billion yen to 35 billion yen. The year-end dividend forecast will remain unchanged at this time. However, we will closely monitor the situation and review as needed. Next on page 4, here is the executive summary of the P&L. On the left, we show the figures for the 3 months from July to September and on the right, the year-to-date for the 9 months. First Q3 year to date, the actual net sales and cooperating profit are explained as earlier. Operating profit is 2.2 billion yen, a decrease of 23.6 billion yen versus last year. In addition to the decline in cooperating profit, the 25.2 billion yen of non-recurring items had a significant impact. In the first half of the year, we incurred structural reform costs related to Japan's early retirement program and organizational optimization and store closures in China. On top of that, we had 3.2 billion yen in costs in Q3, primarily related to the termination of leases for directly operated stores and offices. For non-recurring expenses, we had originally forecasted 30 billion yen for the full year, and there has been no significant difference from that estimate. The quarterly profit attributable to the owners of the parent company was 800 million yen, a decrease of 19.8 billion yen compared to the previous year. Next, cooperating profit for the period from July to September was 8.1 billion yen, with a profit margin of 3.8%. Despite a decrease in actual sales of 8% year-on-year, we maintained the same level of profit margin as in the first half of the year. This result reflects the efforts across the company of prioritization of investments and thoroughly managing costs. While the profit margin is not at a level we are fully satisfied with, we will continue working toward establishing a high profitability structure going forward. Next is page 5, the net sales by brand. Elixir accelerated its growth significantly from a 5% increase in the first half to an 18% increase in the third quarter, resulting in a 9% growth for the nine months. The launch of the Youth Accelerator Serum, the serum, in Japan in September had a strong start, with cumulative shipments reaching 520,000 units just 10 days at performance, particularly in EMEA and the Americas. On the other hand, other key brands saw a decline due to the impact of reduced sales in travel retail, China and the Americas. Branch Isedo experienced a 7% decrease globally, primarily due to the declined sales in travel retail in China. Cleto Pobote continued to grow in Japan and China, supported by a strong base of loyal users, but was significantly impacted by the drop in consumption in travel retail, resulting in a 2% decline globally. Drunk Elephant faced a substantial drop in shipments in Americas and also saw negative growth in EMEA in Q3, turning negative globally. We recognize that revitalizing brand Shiseido in China and recovering consumer purchases of drunk elephant in the Americas are our urgent priorities, and we are committed to making every effort to address these challenges and drive recovery. Next on page six, we have the year-on-year net sales by region. On a cumulative basis, Japan, EMEA, and Asia Pacific saw an increase in sales, while China, travel retail, and the Americas experienced a decline. In Japan, shipments increased by 5% in the third quarter, showing a slight slowdown compared to previous growth rates. However, consumer purchases have remained strong. Since May of last year, following the full post-COVID reopening, we have maintained growth momentum despite higher year-on-year comps. This is a reassuring sign that our strategy of selection and concentration, along with innovations driven by our technical capabilities, is working effectively. Next, EMEA, which had maintained strong growth through the first half of the year, saw a temporary decline in the third quarter due to the impact of delayed shipments of holiday products and the high year-on-year comps from last year's initial shipments of new products. In China and travel retail, Chinese consumer spending declined even further compared to the first half of the year, resulting in a larger than expected negative growth. For the Americas, we had originally expected a recovery in the second half of the year. However, after the decline in the second quarter, sales also fell short of expectations in the third quarter, resulting in a significant drop in revenue. Next is page 7 about Japan. In the third quarter, local market continued to maintain growth. Despite higher year-on-year comps, the positive trend from the first half of the year was sustained. As for inbound sales, while the number of inbound tourists to Japan continues to rise, there has been a declining trend in cosmetic purchases, and the pace of growth has slowed down. Amidst this, our Japan business continued to lead overall growth with strong performance, achieving a robust growth rate in the low teen percentage for core brands. The increase in market share in the mid to high price segment contributed to this expansion, and overall we saw an increase in market share. Both Shiseido, Clé de Peau Beaute, and Elixir have steadily been growing their user base, and all three brands have expanded their share in local market. Following the success of Shiseido's Foundation Serum, Elixir's Youth Accelerator Serum has also gained significant market share in the serum category, recording a major hit. E-commerce sales have also continued to show steady growth, expanding at a pace of high 20%, outperforming the overall business as we continue to expand the range of brands available online. As for inbound sales, the Q3 results were below expectations. However, we will cover this shortfall with increase to sales from the strong performance of our local business. Next is page 8, China and travel retail. First, regarding the Chinese market, consumer spending continues to decline due to increased saving tendencies and a more cautious approach to spending, driven by uncertainties about the economic outlook. This situation has become even more challenging compared to the first half of the year. our business in China continued to experience negative growth. By channel, e-commerce showed a solid performance with a growth rate in the low 20% range in the third quarter, benefiting from the relatively low comps last year following the release of treated water from Fukushima, which led to reduced purchases of Japanese products. However, offline sales saw a significant decline. From a brand perspective, brand Shiseido, in particular, despite last year's significant decline, experienced further decline in sales. To rebuild the brand value, we will accelerate our efforts for selection and concentration investment strategy on key products. Next, regarding travel retail, the decline in spending by Chinese travelers has been more significant than expected, and the situation has become increasingly challenging. While we have already implemented inventory adjustments, we will continue to rigorously manage inventory levels and to ensure control so that we do not have excessive shipments. We will also maintain our strategy of focusing on traveler-centric business and intentionally reducing non-tourist sales. While the current situation remains difficult with prolonged profit declines across the company, we are committed to improving the health of the business and ensuring stable mid- to long-term growth. Despite the challenges, travel retail in Japan has continued to grow, driven by a recovery in the number of store visitors. In EMEA and the Americas, high growth rates have continued, particularly in the fragrance segment.

Next, page 9, we will look at the Americas. As of August, we have reported that the decline in sales since the second quarter was a temporary phenomenon caused by a decrease in production, and we would aim to achieve the high rate of growth in the second half of the year as production and inventory return to appropriate levels. Unfortunately, however, The result fell far short of our expectations and sales also declined in the third quarter. We were aware that consumers were turning away from the products due to the lack of stock in stores caused by the supply shortage in the first half of the year. So we made additional investments in marketing measures for our select and focused brands in order to recover from this. As a result, NAS turned positive in the third quarter, but Drunk Elephant was slow to recover and the negative margin widened. In addition, there was a trend among consumers to trade down in the oppressive skincare market, and Shiseido also lost market share, resulting in a decline in our shipment sales. We are currently discussing the ideal brand, price range, channel, and management approach for our overall business in the Americas. Next, page 10. The European market continued to grow in all categories. Although sales in the third quarter were affected by the partial delay in shipments to the fourth quarter, in the fourth quarter, we launched an advanced cream from the Vital Perfection line and the cream from the Bio Performance line in September and October, respectively, for Shiseido. By making solid investments in marketing for the media, we are planning to achieve growth in the high teens in real terms. although this is preliminary data shipments in October are progressing as planned. In Asia-Pacific, the slowdown in the Taiwanese market accounting for a large proportion of our sales had an impact, but this was covered by growth in other major countries and regions. Anessa, Shiseido and Kledopopote continue to grow. Next, on page 11, we will look at core operating income by segment. In Japan, we saw significant increase in income due to not only higher sales but also an improvement in the gross profit margin due to a better profit product mix and price increase as well as the effects of structure reform. There was also a want of increase in income due to the deferral of some expenses, but we are continuing to make steady progress towards our target of over 20 billion yen in annual income. As I explained earlier, inbound tourism is weaker than expected, and though sales are currently about half the size of the peak in 2019, we are still generating a profit, and we believe that we are steadily making progress in reforming our business structure to be able to generate profits locally. In China, despite a 9% decrease in revenue and a negative 9% real growth rate for the third quarter, profits increased by 600 million yuan. Thank you very much. to maintain and accelerate customer purchases. So while sales increased and profits decreased in the third quarter, we are aiming to improve profitability along with the recovery in sales in the fourth quarter. In addition, although troubled retail is our most profitable segment, the significant decline in sales has led to a fall in profits. This decline in troubled retail sales has also had a significant impact in other segments, reducing internal sales and margins. As a result, overall profits for the third quarter fell by 9.4 billion yen. Adjustments were also affected by the change in the elimination of unrealized profits, leading to a decline in profits. Last year, the adjustment for the elimination of unrealized profit had a significant positive effect due to a reduction in inventory in anticipation of a worsening outlook, mainly in China and travel retail. This year, the main factor was the decrease in profit as a reaction to that. Next page on page 12, we look at the global cost reduction and profit improvement measures that we are promoting as part of a global transformation. In the first half year, we generated 7 billion yen in benefits and in the third quarter, we generated approximately 4.5 billion yen in benefits. When combined with the expected benefits from the fourth quarter, we expect to generate 20 billion yen in benefits for the year, which is 5 billion yen more than our initial forecast. We are accelerating the implementation of structural reforms, mainly in China, focusing on reducing fixed costs, and also in Europe, United States, Asia, and our plans by improving costs and optimizing logistics on a global basis. Next, page 13, I will talk about the progress of the structural reform program in Japan. Mirai Ship Nippon 2025. Improvements in both profitability and productivity are steadily progressing. First, in terms of profitability, the growth of core brands through selection and consideration, the implementation of strategic price increases and improvement of the product mix through the launch of new and high-end products in the mid-price range will continue. Thank you very much. to operate our business and have closed our Harajuku flagship store and our global flagship store in Ginza, as well as terminating our office lease. In addition to improving profitability, we're also working to improve cash flow and improve capital efficiency by reducing our balance sheet. Turning to productivity, although we significantly reduced our workforce at the end of September through our early retirement support plan, we have not seen a decline in sales momentum during the transition period thanks to the improvement in the employee productivity and optimum personnel allocation that we have been working on as part of our structure reform. Personal beauty partners are implementing reforms aimed at increasing sales per person, and we are promoting optimum personnel allocation and the activation of activities that make the most of digital and specialist skills in order to maximize our customer contact points. We are also promoting productivity improvements for sales staff by transferring employees authority and responsibility to the frontline so that decisions and actions can be made quickly and from the frontline in terms of operation. Next, page 14, we will explain the outlook. As I mentioned at the beginning of this presentation, we have revised our four-year outlook in light of the significant changes in the market environment. The main reasons for this are the lower than expected sales and trouble retail in China and the delayed recovery in the Americas, which I will explain in more details in the next slide. In light of these factors, we have revised the initial focus of 8% real growth to a negative 1% for the year and positive 6% for the fourth quarter. Although this means that we are moving from a negative 8% in the third quarter to a positive figure, given the low hurdle caused by the impact of treated water in China last year, we are not placing too high a growth rate. And based on the initial response to double 11, etc., we are confident in the accuracy of our forecast. We are also revising our focus for the co-operating income to 35 billion yen and for profit attributable to the owners of the parent to 6 billion yen. We will maintain the year-end dividend at the current level for now, but we will continue to monitor the situation closely and conduct a thorough review. Finally, on page 15, we will look at the difference between the previous focus of for full-year co-operating income. The decrease in marginal income due to lower sales in travel retail, China, and the Americas was partially offset by flexible cost controls and effects of structural reforms. There was an increase in income due to the depreciation in yen, but the impact of the decrease in income in the high-margin travel retail business was significant. The co-operating income is expected to be 35 billion yen, a decrease of 20 billion yen. Despite these difficult circumstances, we will steadily work on the issue we currently face in order to ensure that we can steadily increase profits and improve profitability in line with the strong revenue growth in Japan, our home country, and to build a new business foundation that can generate stable revenue for the entire company. That is all from me.

In the earnings announcement in August, I mentioned that a briefing session would be held at the end of November. Today, I would like to take this opportunity to touch on how we view the coming two years, 2025 and 2026. Since 2023, we have been advancing our midterm business strategy, Shift 2025 and Beyond. This slide here outlines the objectives we have aimed under the Shift 2025 and Beyond strategy, which was announced in February of this year. Aiming for sustained profit growth and the building of a resilient business structure, we have been working on these initiatives with the full commitment of the entire company. As for global cost reduction, as Hirofuji-san already mentioned, we are already seeing results for 2024 exceeding the initial target of 15 billion yen. We will continue to make steady progress to achieve target of over 25 billion yen planned for 2025. Regarding the reforms aimed to improve profitability in Japan, we have been driving the initiatives last year and we are steadily seeing improvements in both profitability and productivity. However, in order to achieve the target of 50 billion yen in core operating profit next year, Japan, the largest and most important mother market, must aim for even higher levels of earnings potential. On the other hand, while we have been aiming for high-quality growth in China and travel retail within the framework of stable growth, the market has experienced negative growth and the outlook for the future is not optimistic. Given the significant impact of the situation, we believe a strategic review is necessary. As a result of the review of the strategies in China and travel retail, while the Americas, EMEA, and Asia Pacific have been achieving growth, there is a need for greater focus on improving profitability moving forward. Regarding the growth momentum of our core brands, given the market environment changes, we believe that a review and strengthening of our approach is necessary. In response to the significant changes in the market, the company, as one team, will face the reality with strong sense of urgency to complete the transformation we initially set out to achieve, which is to build a more resilient organization and profit structure that is thus dependent on market conditions globally. In order to achieve this, the strategic direction for the years 2025 and 2026 will focus on Formulating a business plan that does not rely on excessive growth, establishing a profitable revenue structure even under challenging market conditions, and instead of blaming the market environment, concentrating on controllable factors and thoroughly executing countermeasures ourselves. The key difference from the past is that we are starting with the mindset of letting go of excessive growth expectations and optimistic assumptions and instead building a profitable structure even under challenging market conditions. The must-win battles for our company are the six listed here, and we will prioritize these efforts for 2025 to 2026. These are all initiatives that we can execute to achieve results through our own efforts and decisions. By carrying them out with strong determination, we aim to build a foundation for growth.